Beyond Water Pricing: An Overview of Water Financing Options in California

California’s social and economic well-being is directly tied to financing for reliable, sustainable water. A new study from the Pacific Institute explores stable and sustainable sources of funding for water projects as a key to long-term solutions, and finds California’s increased dependence on general obligation (GO) bonds in funding water systems is unreliable and costly to both the state and taxpayers.

Current water rates often do not fully cover the cost of providing water services and rarely reflect the full costs of the water itself, such as the ecosystem impacts related to extracting water. California ranks at the top of the EPA’s survey of infrastructure needs in terms of the investments required to maintain aging water systems over the next two decades. Climate change, continued population growth, and restoring critical ecosystems will add further to these costs.

“Various financing options are used to invest in existing water systems and services, develop new ones, and mitigate environmental impacts, but there are serious economic and financial challenges,” said Dr. Newsha Ajami, lead author of the report. “The water sector needs a more comprehensive and stable financing portfolio.”

According to the California Department of Water Resources, nominal annual debt service for outstanding general obligation water bonds in California has increased four-fold since 2000. This shift to greater use of bond funding can be linked to the decreased ability to raise government revenues through taxes and fees as a result of voter-approved initiatives like Proposition 13 and 218. General obligation bonds, however, are not a steady and reliable source of funding for long-term planning and decision-making because they require voter approval if they survive the legislative process, which is sensitive to economic ups and downs.

There is a growing urgency to find mechanisms to reinvest in water and wastewater management systems in order to continue to provide reliable, high-quality water services as California deals with the direct and indirect impacts of climate change and extreme weather patterns, decaying water and wastewater systems, ecosystem challenges, emerging contaminants and stricter water quality requirements, and population and economic growth.

“Each of the financing options has its challenges, and different water systems of different sizes have different needs,” said Ajami. “For example, despite much agreement on the need for more stable funding sources for water improvements, there has been strong opposition to the idea of a state-run public benefit fund for water. California needs to continue to further explore more innovative sources of funding to finance urgently needed water projects, such as revolving loan programs for water efficiency and conservation projects, on-bill financing, and public-private partnerships.”